U.S./Israel-Iran War: the Middle East On Edge
NextFin News - Poland's central bank held interest rates steady for a sixth straight month on Wednesday, keeping its benchmark at 3.75% as economists expected, even as surging fuel prices push inflation toward the top of the bank's tolerance band. The decision by the Monetary Policy Council leaves Governor Adam Glapinski's wait-and-see pause intact, but it also sets up the hardest test of that strategy: a policy rate frozen in place while the price pressures he was counting on to fade keep climbing.
The council's hold, anticipated by every economist in a broad survey of forecasts, came as energy-linked price pressures - driven by the still-unresolved war between the United States and Israel against Iran - feed through to Polish consumers. Glapinski is scheduled to face the press at 3 p.m. on Thursday, when markets will be listening less for what the bank did than for how long it believes it can keep doing nothing.
The Decision: A Pause That Is Getting Harder to Hold
The 3.75% benchmark rate is the product of a long easing campaign that has now run into a wall. The National Bank of Poland cut its main rate six times in 2025, a total of 175 basis points, bringing it down to 4.00% by December. A further 25-basis-point reduction earlier this year - made as investors across Europe abandoned rate-cut bets following the outbreak of the Iran war - took the benchmark to its current 3.75%, where it has sat ever since.
That sequence matters because it frames the present moment as a reversal of fortune. Through late 2025, the council's own members were debating whether to keep cutting. In November, central banker Ludwik Kotecki framed the council's thinking around the inflation forecast:
"If the forecasts are indeed confirmed and inflation falls to the target, there are no objections to at least discussing interest rate cuts even in December, and perhaps the Council will decide to give Poles a Christmas gift in the form of lower interest costs."
By December, the tone had already shifted. Council member Ireneusz Dabrowski told the state news agency that policymakers would be "increasingly cautious," and Governor Adam Glapinski said the central bank would
"probably move to a wait-and-see mode before any further cuts."
Six months of holds later, that wait-and-see posture has become a stalemate.
The stalemate exists because two facts now point in opposite directions. On one side, inflation had been drifting back toward the National Bank of Poland's 2.5% target after the post-pandemic surge, and the council has been betting that the fuel-price spike is a temporary war premium that will fade once the Middle East conflict de-escalates. On the other side, that conflict has not de-escalated - it has intensified, with direct exchanges between the United States and Iran in recent weeks sending oil back above $90 a barrel and lifting prices toward levels last seen before a brief June peace window closed.
Poland's inflation framework gives the council a specific line in the sand. The statutory target is 2.5%, with a fluctuation band of plus or minus one percentage point - meaning 3.5% is the ceiling. With fuel costs boosting the headline print, inflation is now pressing near the top of that range. That is not yet a breach, but it is close enough that a central bank with a 2.5% target cannot credibly describe itself as comfortably on path.
There is also a timing pressure the council cannot wish away. Thursday's press conference will be the first real opportunity for Glapinski to explain why holding at 3.75% remains appropriate with inflation at the edge of the band. The words will matter, but the market will weigh them against the data - and the data, for now, point upward.
Why Fuel Is the Problem Poland Cannot Talk Away
The mechanism is straightforward, and it is the same one now troubling central banks from Warsaw to London. Poland is an economy exposed to imported energy costs, so when global crude rises, the pass-through to domestic pump prices and utility bills is fast and nearly mechanical. Unlike core inflation - which reflects the slower-moving balance of wages, rents, and services - energy inflation moves in jumps. Across the euro area, energy inflation accelerated to 14.3% in August from 10.3% the prior month, according to the European Union's statistics office. Poland, buying into that same energy market, faces the same supply shock.
Here is the uncomfortable arithmetic for the council. Headline inflation is what households feel at the pump and the grocery checkout, and it is what shows up in the tolerance-band calculation. If headline inflation sits near 3.5% while the target is 2.5%, the bank is tolerating a full percentage point of overshoot on the strength of a forecast that the overshoot is temporary. That is a defensible position only if the temporary driver actually proves temporary.
The council's gamble is that this is a cyclical shock layered on top of a structurally disinflating economy. The evidence for the cyclical read is real: before the war, Polish inflation had been decelerating and moving back toward target, and the bank's 2025 cutting cycle was premised on that trajectory. Energy prices themselves are notoriously mean-reverting - the June dip in oil, when a brief peace deal lifted hopes of an end to the fighting, showed how quickly the pressure can ease. If the war ends or freezes, fuel prices can fall almost as fast as they rose, and headline inflation would drop back toward core without the central bank having to do anything at all.
But there is a structural counter-current that the cyclical story has to overcome. The Iran war did not happen in a vacuum. It is the latest episode in more than half a decade of supply-side fragmentation - pandemic disruptions, the Russia-Ukraine war, sanctions, and now a Middle East conflict threatening the Strait of Hormuz, through which roughly a fifth of global oil and gas flows pass. Each episode has taught exporters and importers to hold more inventory, duplicate supply chains, and price in a risk premium that does not fully go away. That is not a cyclical blip; it is a higher baseline cost of doing business in a fragmenting world.
Poland has its own structural pressure too, and it is fiscal rather than external. The country is in the middle of a defence-spending surge, and Glapinski himself floated a proposal in March to tap unrealised profits on the central bank's gold reserves - as much as 48 billion zloty, or roughly $13 billion - to fund military outlays. Whether through gold sales or revaluation, the direction of travel is clear: Poland is choosing to run a hotter fiscal stance for security reasons. Fiscal expansion is inflationary by nature. It puts more money into an economy already absorbing an energy shock, and it gives the central bank less room to claim that any overshoot is purely imported and therefore temporary.
The combination is what makes this more than a standard energy-spike story. An energy shock alone can be waited out. An energy shock arriving while fiscal policy is expanding and supply chains are being re-priced for geopolitical risk is a different problem - and it is the reason the council's patience carries a growing cost.
The Regional Divergence: Why Poland Is Now the Odd One Out
The hold also stands out against what Poland's peers are doing. The European Central Bank, facing the same energy shock, raised its key rate to 2.25% in June - its first increase since 2023 - after euro-area inflation climbed back above 3% in August. ECB President Christine Lagarde has warned that inflation is likely to remain well above target into the first half of 2027. The Bank of England, in July, held at 3.75% but on a 6-3 vote in which three members voted for an immediate quarter-point hike as oil climbed back above $90 a barrel. Across the continent, the direction of travel has turned back toward tightening.
Poland, by contrast, is still officially in a pause that was meant to precede further easing. That divergence is the second-order story markets will focus on, and it is where the council's patience can turn against it. When a central bank holds while peers tighten, the yield gap that supports its currency narrows. A weaker currency then makes imported energy and goods more expensive in local-currency terms - which feeds back into the very inflation the council is trying to contain. It is a self-reinforcing loop, and it is the classic trap for a central bank that waits too long.
The transmission channel is not theoretical. Poland's inflation target band is calculated in domestic-currency terms. If the currency depreciates because investors price in a more patient central bank relative to the ECB and the Bank of England, then every barrel of imported oil and every unit of imported gas costs more in local currency, and the headline print rises even if the dollar price of energy is unchanged. The council's patience, in other words, carries its own inflationary cost - and that cost grows the longer the pause lasts.
This is the mechanism that separates a well-timed pause from a delayed reaction. A pause that ends while the currency is still stable preserves the bank's options. A pause that ends only after the currency has already done the tightening for it means the bank arrives at the same destination having already absorbed the pain - a weaker currency and higher import prices - without the credibility gain.
The Counter-Thesis: Why Waiting May Still Be Right
The strongest case for the council is also the simplest: do not let a war-driven energy spike dictate permanent policy. Raising rates in response to a supply shock does not produce more oil. It slows demand, it raises borrowing costs for households and firms, and it risks tipping an economy into recession - all to fight a price increase that monetary policy cannot fix. If the fuel spike reverses on its own, a hike today would be a policy error that shows up later as unnecessarily weak growth and higher unemployment.
This argument has serious backing. Central bankers across Europe have made versions of it for months; the ECB's own decision to hold before it turned in June was premised on the view that energy volatility should not be over-reacted to. And the historical record is on the waiters' side - energy shocks since the 1970s have mostly reversed, and headline inflation has mostly mean-reverted once the supply disruption passed. For Glapinski, the bet is that the Iran war, like the pandemic and the first year of the Russia-Ukraine conflict, will prove to be a spike rather than a new plateau.
The problem with that argument is the threshold at which it stops being patience and starts being denial. A central bank with a 2.5% target and a 3.5% ceiling can absorb a few months of overshoot. It cannot absorb a permanent one. The falsifying signal is specific and observable: if Poland's headline inflation prints at or above 3.5% - the top of the tolerance band - for two consecutive months, and core inflation does not continue to fall alongside it, then the overshoot has stopped being temporary. At that point, the cyclical explanation is no longer sufficient, and the council would need to either raise rates or explicitly accept a higher inflation regime. A single month above 3.5% could be dismissed as a fuel blip; two months is a trend.
What Comes Next: Three Scenarios
Base case - hold through the noise. The council keeps rates at 3.75% through the rest of 2026, treating the fuel-driven inflation as a passing war premium. This requires the Iran conflict to remain contained and oil to retreat from current levels. Inflation drifts back toward 3% as energy fades, and the bank resumes its cutting bias in early 2027. The currency remains range-bound, and the divergence with the ECB narrows as European energy prices stabilise.
Upside case for inflation - the hawkish turn. Oil stays above $90 and the conflict widens, pushing Polish headline inflation above 3.5% for two consecutive months. The council is forced to signal a hike, the currency stabilises or strengthens on the yield pickup, and Poland rejoins the regional tightening cycle. Borrowing costs rise for households and businesses, but the credibility of the inflation target is preserved.
Downside case - the delayed reaction. The council holds too long, the currency weakens materially against the euro and the dollar, and imported inflation compounds the fuel shock. Headline inflation overshoots the band decisively, forcing a larger and more disruptive tightening later - the classic "behind the curve" outcome that costs more growth than an earlier, smaller move would have.
Across all three scenarios, the watch items are the same: the monthly inflation print relative to the 3.5% ceiling, the trajectory of core inflation, the currency's exchange rate, and - above all - the path of the Iran war and the oil price that follows it. Glapinski's Thursday press conference will be scanned for any shift in language, but the data will matter more than the words.
The central judgment: Poland's pause was reasonable when inflation was falling and the war looked containable. It remains reasonable for one or two more months if oil retreats. But a central bank cannot hold rates steady forever on the hope that a war will end - and if inflation sits at the top of the tolerance band into year-end, the wait-and-see policy stops being patience and starts being a bet against the price of oil. That is a bet the National Bank of Poland does not control, and it is not a strategy.
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